• The summer economic forecast of the Ministry of Finance describes the outlook for the Estonian economy reliably and is an appropriate basis for drafting the state budget
  
• The Fiscal Council recommends that a small structural surplus should be planned for 2019
  

Foreign demand grew faster than expected last year, which allowed the growth forecast for the Estonian economy to be raised. Several factors have now appeared though that could slow the growth in foreign demand. The first is the increasing restrictions on foreign trade around the world, and the second is that this year several large developing states have experienced economic difficulties. In consequence the Ministry of Finance is justified in reducing its forecast for real growth in the economy.

The Fiscal Council finds that the summer forecast of the Ministry of Finance describes the outlook for economic growth and inflation in Estonia accurately enough and is in line with the forecasts of several other institutions.

Tax revenues will continue to grow rapidly next year too. Receipts of labour taxes may grow even faster than expected, though the risk is greater on the downside for VAT receipts. Overall, the Fiscal Council finds that the risks of tax receipts being higher or lower than forecast are in balance and the fiscal forecast can be considered an appropriate basis for drafting the state budget for next year.

The Fiscal Council considers the cyclical position of the Estonian economy to be better than that estimated by the Ministry of Finance, and this means there are slightly different opinions on the structural fiscal position. Rapid wage growth, low unemployment, a large number of vacancies, and a rise in the employment rate, which is already high, all indicate peak cyclical conditions. Businesses also indicate that the economic environment is much better than usual.

The summer forecast of the Ministry of Finance puts the fiscal position of the general government in a structural deficit of 0.2% of GDP in 2019. The Fiscal Council recommends that when the state budget for 2019 is drafted, the structural fiscal position of the general government should be at least 0.4 percentage point of GDP, or some 100 million euros, better than in the summer forecast.

There are two reasons for the recommendation of the Fiscal Council. The first is that the fiscal position should be improved by 0.2 percentage point to ensure that the target of structural balance set in the state budget strategy is met. We recommend that the fiscal position should then be improved by at least 0.2 percentage point as the current state of the economy means it is not wise to loosen the fiscal policy stance. The Ministry of Finance expects a structural surplus of 0.2% of GDP for 2018.

For this reason the Fiscal Council recommends that a state budget be passed for 2019 that sets the target for the general government of a small surplus in the structural fiscal position.

The Fiscal Council's opinion and a more thorough explanatory report can be found here.

The State Budget Act requires the Fiscal Council to give within two weeks its opinion on the summer macroeconomic and financial forecast of the Ministry of Finance, which serves as the basis for planning the state budget for the next year. The Fiscal Council presented the key messages of its opinion at a meeting of the government cabinet on 19 September.

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082
Email: raul.eamets@ut.ee